1. A judgment of the Circuit Court of Appeals holding a
beneficiary named in a trust taxable upon trust income
notwithstanding assignments previously made by him, and basing this
conclusion upon the ground that, under the local law, the trust was
a spendthrift trust giving the beneficiary no power to assign,
held inapplicable as
res judicata in favor of the
Government in proceedings to collect taxes from the same person,
for subsequent years, the situation having been changed meanwhile
by a decision of the state court construing the trust and upholding
the assignments.
Tait v. Western Maryland Ry. Co.,
289 U. S. 620,
distinguished. P.
300 U. S. 8.
2. Whether a testamentary trust is a spendthrift trust barring
the voluntary alienation of his interest by the beneficiary
depends
Page 300 U. S. 6
upon the law of the State in which the donor resided and in
which the trust was created and the property situated. P.
300 U. S. 9.
3. A decision by the intermediate appellate court of Illinois
upholding the right of the life beneficiary of a trust to assign
parts of his interest, in suit brought by the trustees for
instructions and impleading the beneficiary and his assignees,
held conclusive of the validity of the assignments. P.
300 U. S. 10.
4. In the general application of the Revenue Acts, income tax
liability is attached to ownership. P.
300 U. S. 11.
5. Provisions of the Revenue Acts (1921, § 219(a)(d); 1924 and
1926, § 219(a)(b); 1928, § 162(a)(b)) imposing upon the beneficiary
of a trust liability for the tax upon the income "distributable" to
him, refer to the owner of the beneficial interest, whether he was
such initially or becomes such by an assignment valid under the
local law governing the trust. P.
300 U. S. 12.
6. Assignments of interests, of specified amounts each year
thereafter, in the net income which the assignor was then or might
thereafter be entitled to receive during his life under a trust,
held assignments not merely of the right to receive
income, but of corresponding interests in the trust estate. P.
300 U. S. 12.
7. A beneficiary entitled during life to the income of property
held in trust is the owner, not of a chose in action merely, but of
an equitable interest in the corpus of the property, and that
interest, in the absence of a valid restraint upon alienation, he
may assign in part, or as a whole. P.
300 U. S. 13.
83 F.2d 655, 662, reversed.
Certiorari, 299 U.S. 527, to review a judgment which reversed a
decision of the Board of Tax Appeals, 31 B.T.A. 1192, overruling
income tax assessments.
Page 300 U. S. 7
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
This case presents the question of the liability of a
beneficiary of a testamentary trust for a tax upon the income which
he had assigned to his children prior to the tax years and which
the trustees had paid to them accordingly.
The trust was created by the will of William Blair, a resident
of Illinois who died in 1899, and was of property located in that
State. One-half of the net income was to be paid to the donor's
widow during her life. His son, the petitioner Edward Tyler Blair,
was to receive the other one-half and, after the death of the
widow, the whole of the net income during his life. In 1923, after
the widow's death, petitioner assigned to his daughter, Lucy Blair
Linn, an interest amounting to $6,000 for the remainder of that
calendar year, and to $9,000 in each calendar year thereafter, in
the net income which the petitioner was then or might thereafter be
entitled to receive during his life. At about the same time, he
made like assignments of interests, amounting to $9,000 in each
calendar year, in the net income of the trust to his daughter Edith
Blair and to his son, Edward Seymour Blair, respectively. In later
years, by similar instruments, he assigned to these children
additional interests, and to his son William McCormick Blair other
specified interests, in the net income. The trustees accepted the
assignments and distributed the income directly to the
assignees.
The question first arose with respect to the tax year 1923, and
the Commissioner of Internal Revenue ruled that the income was
taxable to the petitioner. The Board of Tax Appeals held the
contrary. 18 B.T.A. 69. The Circuit Court of Appeals reversed the
Board, holding that, under the law of Illinois, the trust was a
spendthrift trust,
Page 300 U. S. 8
and the assignments were invalid.
Commissioner v.
Blair, 60 F.2d 340. We denied certiorari. 288 U.S. 602.
Thereupon the trustees brought suit in the superior court of
Cook county, Illinois, to obtain a construction of the will with
respect to the power of the beneficiary of the trust to assign a
part of his equitable interest and to determine the validity of the
assignments he had made. The petitioner and the assignees were made
defendants. The Appellate Court of Illinois, First District, after
a review of the Illinois decisions, decided that the trust was not
a spendthrift trust, and upheld the assignments.
Blair v.
Linn, 274 Ill.App. 23. Under the mandate of the appellate
court, the superior court of Cook county entered its decree which
found the assignments to be "voluntary assignments of a part of the
interest of said Edward Tyler Blair in said trust estate" and, as
such, adjudged them to be valid.
At that time, there were pending before the Board of Tax Appeals
proceedings involving the income of the trust for the years 1924,
1925, 1926, and 1929. The Board received in evidence the record in
the suit in the state court, and, applying the decision of that
court, the Board overruled the Commissioner's determination as to
the petitioner's liability. 31 B.T.A. 1192. The Circuit Court of
Appeals again reversed the Board. That court recognized the binding
effect of the decision of the state court as to the validity of the
assignments, but decided that the income was still taxable to the
petitioner upon the ground that his interest was not attached to
the corpus of the estate, and that the income was not subject to
his disposition until he received it.
Commissioner v.
Blair, 83 F.2d 655, 662.
Because of an asserted conflict with the decision of the state
court, and also with decisions of circuit courts of appeals, we
granted certiorari. October 12, 1936.
First. The Government contends that the judgment
relating to the income for 1923 is conclusive in this
proceeding
Page 300 U. S. 9
as
res judicata. Tait v. Western Maryland Ry.
Co., 289 U. S. 620.
Petitioner insists that this question was not raised before the
Board of Tax Appeals, and hence was not available before the
Circuit Court of Appeals.
General Utilities Co. v.
Helvering, 296 U. S. 200,
296 U. S. 206;
Helvering v. Savage, 297 U. S. 106,
297 U. S. 109.
The Government respondents that the answers before the Board of Tax
Appeals in the instant case had been filed before the first
decision of the Circuit Court of Appeals was entered, and that,
while the case was heard before the Board without amended
pleadings, the whole matter was actually before the Board and the
question of
res judicata was raised by an assignment of
error on the petition for review before the Circuit Court of
Appeals.
It is not necessary to review the respective contentions upon
this point, as we think that the ruling in the
Tait case
is not applicable. That ruling and the reasoning which underlies it
apply where, in the subsequent proceedings, although relating to a
different tax year, the questions presented upon the facts and the
law are essentially the same.
Tait v. Western Maryland Ry. Co.,
supra, pp.
289 U. S.
624-626. Here, after the decision in the first
proceeding, the opinion and decree of the state court created a new
situation. The determination of petitioner's liability for the year
1923 had been rested entirely upon the local law.
Commissioner
v. Blair, 60 F.2d 340, 342, 344. The supervening decision of
the state court interpreting that law in direct relation to this
trust cannot justly be ignored in the present proceeding so far as
it is found that the local law is determinative of any material
point in controversy.
Compare Freuler v. Helvering,
291 U. S. 35;
Hubbell v. Helvering, 70 F.2d 668.
Second. The question of the validity of the assignments
is a question of local law. The donor was a resident of Illinois,
and his disposition of the property in that State was subject to
its law. By that law, the character
Page 300 U. S. 10
of the trust, the nature and extent of the interest of the
beneficiary, and the power of the beneficiary to assign that
interest in whole or in part are to be determined. The decision of
the state court upon these questions is final.
Spindle v.
Shreve, 111 U. S. 542,
111 U. S.
547-548;
Uterhart v. United States,
240 U. S. 598,
240 U. S. 603;
Poe v. Seaborn, 282 U. S. 101,
282 U. S. 110;
Freuler v. Helvering, supra, p.
291 U. S. 45. It
matters not that the decision was by an intermediate appellate
court.
Compare Graham v. White-Phillips Co., 296 U. S.
27. In this instance, it is not necessary to go beyond
the obvious point that the decision was in a suit between the
trustees and the beneficiary and his assignees, and the decree
which was entered in pursuance of the decision determined as
between these parties the validity of the particular assignments.
Nor is there any basis for a charge that the suit was collusive,
and the decree inoperative.
Freuler v. Helvering, supra.
The trustees were entitled to seek the instructions of the court
having supervision of the trust. That court entertained the suit,
and the appellate court, with the first decision of the Circuit
Court of Appeals before it, reviewed the decisions of the Supreme
Court of the State and reached a deliberate conclusion. To derogate
from the authority of that conclusion and of the decree it
commanded, so far as the question is one of state law, would be
wholly unwarranted in the exercise of federal jurisdiction.
In the face of this ruling of the state court, it is not open to
the Government to argue that the trust "was, under the Illinois
law, a spendthrift trust." The point of the argument is that, the
trust being of that character, the state law barred the voluntary
alienation by the beneficiary of his interest. The state court held
precisely the contrary. The ruling also determines the validity of
the assignment by the beneficiary of parts of his interest. That
question was necessarily presented and expressly decided.
Page 300 U. S. 11
Third. The question remains whether, treating the
assignments as valid, the assignor was still taxable upon the
income under the federal income tax act. That is a federal
question.
Our decisions in
Lucas v. Earl, 281 U.
S. 111, and
Burnet v. Leininger, 285 U.
S. 136, are cited. In the
Lucas case, the
question was whether an attorney was taxable for the whole of his
salary and fees earned by him in the tax years, or only upon
one-half by reason of an agreement with his wife by which his
earnings were to be received and owned by them jointly. We were of
the opinion that the case turned upon the construction of the
taxing act. We said that
"the statute could tax salaries to those who earned them, and
provide that the tax could not be escaped by anticipatory
arrangements and contracts, however skilfully devised, to prevent
the salary when paid from vesting even for a second in the man who
earned it."
That was deemed to be the meaning of the statute as to
compensation for personal service, and the one who earned the
income was held to be subject to the tax. In
Burnet v.
Leininger, supra, a husband, a member of a firm, assigned
future partnership income to his wife. We found that the revenue
act dealt explicitly with the liability of partners as such. The
wife did not become a member of the firm; the act specifically
taxed the distributive share of each partner in the net income of
the firm, and the husband, by the fair import of the act, remained
taxable upon his distributive share. These cases are not in point.
The tax here is not upon earnings which are taxed to the one who
earns them. Nor is it a case of income attributable to a taxpayer
by reason of the application of the income to the discharge of his
obligation.
Old Colony Trust Co. v. Commissioner,
279 U. S. 716;
Douglas v. Willcuts, 296 U. S. 1,
296 U. S. 9;
Helvering v. Stokes, 296 U. S. 551;
Helvering v. Schweitzer, 296 U. S. 551;
Helvering v. Coxey, 297 U.S.
Page 300 U. S. 12
694.
See also Burnet v. Wells, 289 U.
S. 670,
289 U. S. 677.
There is here no question of evasion or of giving effect to
statutory provisions designed to forestall evasion; or of the
taxpayer's retention of control.
Corliss v. Bowers,
281 U. S. 376;
Burnet v. Guggenheim, 288 U. S. 280.
In the instant case, the tax is upon income as to which, in the
general application of the revenue acts, the tax liability attaches
to ownership.
See Poe v. Seaborn, supra; Hoeper v. Tax
Commission, 284 U. S. 206.
The Government points to the provisions of the revenue acts
imposing upon the beneficiary of a trust the liability for the tax
upon the income distributable to the beneficiary.
* But the term is
merely descriptive of the one entitled to the beneficial interest.
These provisions cannot be taken to preclude valid assignments of
the beneficial interest, or to affect the duty of the trustee to
distribute income to the owner of the beneficial interest, whether
he was such initially or becomes such by valid assignment. The one
who is to receive the income as the owner of the beneficial
interest is to pay the tax. If, under the law governing the trust,
the beneficial interest is assignable, and if it has been assigned
without reservation, the assignee thus becomes the beneficiary, and
is entitled to rights and remedies accordingly. We find nothing in
the revenue acts which denies him that status.
The decision of the Circuit Court of Appeals turned upon the
effect to be ascribed to the assignments. The court held that the
petitioner had no interest in the corpus of the estate, and could
not dispose of the income until he received it. Hence, it was said
that "the income was his," and his assignment was merely a
direction to pay over to others what was due to himself. The
question was considered to involve "the date when the income became
transferable." 83 F.2d 655 at 662. The
Page 300 U. S. 13
Government refers to the terms of the assignment -- that it was
of the interest in the income "which the said party of the first
part now is, or may hereafter be, entitled to receive during his
life from the trustees." From this, it is urged that the
assignments "dealt only with a right to receive the income," and
that "no attempt was made to assign any equitable right, title or
interest in the trust itself." This construction seems to us to be
a strained one. We think it apparent that the conveyancer was not
seeking to limit the assignment so as to make it anything less than
a complete transfer of the specified interest of the petitioner as
the life beneficiary of the trust, but that, with ample caution, he
was using words to effect such a transfer. That the state court so
construed the assignments appears from the final decree which
described them as voluntary assignments of interests of the
petitioner "in said trust estate," and it was in that aspect that
petitioner's right to make the assignments was sustained.
The will creating the trust entitled the petitioner during his
life to the net income of the property held in trust. He thus
became the owner of an equitable interest in the corpus of the
property.
Brown v. Fletcher, 235 U.
S. 589,
235 U. S.
598-599;
Irwin v. Gavit, 268 U.
S. 161,
268 U. S.
167-168;
Senior v. Braden, 295 U.
S. 422,
295 U. S. 432;
Merchants' Loan & Trust Co. v. Patterson, 308 Ill.
519, 530, 139 N.E. 912. By virtue of that interest, he was entitled
to enforce the trust, to have a breach of trust enjoined, and to
obtain redress in case of breach. The interest was present property
alienable like any other, in the absence of a valid restraint upon
alienation.
Commissioner v. Field, 42 F.2d 820, 822;
Shanley v. Bowers, 81 F.2d 13, 15. The beneficiary may
thus transfer a part of his interest. as well as the whole.
See Restatement of the Law of Trusts, §§ 130, 132
et
seq. The assignment of the beneficial interest is not the
assignment of a chose in action. but of the "right, title, and
Page 300 U. S. 14
estate in and to property."
Brown v. Fletcher, supra; Senior
v. Braden, supra. See Bogert, Trusts and Trustees,
vol. 1, § 183, pp. 516, 517; 17 Columbia Law Review, 269, 273, 289,
290.
We conclude that the assignments were valid, that the assignees
thereby became the owners of the specified beneficial interests in
the income, and that, as to these interests, they, and not the
petitioner, were taxable for the tax years in question. The
judgment of the Circuit Court of Appeals is reversed, and the cause
is remanded with direction to affirm the decision of the Board of
Tax Appeals.
It is so ordered.
* Revenue Acts of 1921, § 219(a)(d), 42 Stat. 246; 1924 and
1926, § 219(a)(b), 43 Stat. 275, 44 Stat. 32; 1928, §
162(a)(b).